Laffer Curves in Chinese Cities:Deed Tax Rate Reduction and Fiscal Capacity
The deed tax is an important local tax in China.However,some local governments have used their discretion to lower the deed tax rate.This paper finds that lowering the deed tax rate does not weaken local fiscal capacity,but rather has an upward effect on it.This Laffer effect is particularly prominent in cities below the third tier,with strong demand for real estate specula-tion,or a high rent-to-income ratio.Moreover,the Laffer effect of housing deed tax reduction is greater than other deed tax reductions,and the Laffer effect of both deed tax reductions is the best.Mechanism analysis shows that lower the deed tax rate has significantly promoted real estate sup-ply,demand,and destocking,as well as economic growth.Additionally,it triggers the substitu-tion effect of taxes and fees,increases non-tax revenue and leads to higher non-tax dependence.However,local governments do not make greater tax efforts or reduce expenditures due to the deed tax reduction.Furthermore,lowering the deed tax rate can reduce local tax uncertainty and debt scale,and has no significant impact on"land finance",thereby enhancing fiscal sustainability.
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